Economist Warns Public Sector Pay Increases Could Add up to £10 Billion in Costs

An economist cautioned that the Government could require up to £10 billion to cover the public sector pay hikes if the rumored 5.5% raise turns out to be true.

It is reported that independent pay review bodies are gearing up to recommend such an increase for teachers and approximately 1.3 million NHS employees, surpassing the Government’s anticipated figure.

Paul Johnson, the director of the influential Institute for Fiscal Studies, remarked that the proposed increase aligns with wage growth across various sectors and would result in an additional £3 billion in costs for schools and the NHS alone.

He elaborated on the potential financial implications, indicating that schools do not have a budget specifically allocated for such a substantial raise and that the NHS could face double the additional costs if similar proposals are made.

Mr. Johnson further explained that if a 5.5% increase is implemented across the public sector, the Government may need to secure an extra £10 billion.

An unexpected pay raise could present a significant challenge for the upcoming budget of Rachel Reeves, scheduled for the autumn, which pledged to manage borrowing and ruled out various tax hikes during the campaign.

It is improbable for schools and hospitals to accommodate a 5.5% salary increase within their existing budgets without making cuts elsewhere.

When questioned about potential funding sources, Mr. Johnson emphasized that the options are limited to higher borrowing, increased taxes, or reduced spending in other areas.

He stated, “There is no fourth option.”

If the pay review bodies’ recommendations, set to be released this month, are disregarded, it could result in conflicts with trade unions representing the public sector workers.

Daniel Kebede, the general secretary of the National Education Union, cautioned that ignoring these recommendations might lead to strike action.

He pointed out the efforts made by the new Education Secretary, Bridget Phillipson, to improve relations with the teaching community, expressing concern over potential repercussions if a 5.5% pay increase is not implemented.

A Government spokesperson reassured that the importance of the public sector workers is acknowledged, and the pay review process is ongoing with no final decisions yet made.

They acknowledged the substantial task ahead in managing the fiscal challenges faced by the country.